Weekly Economic Summary - December 25, 2009


OVERVIEW ~ Three subjects caught people’s attention during the week of Monday, December 14, through Friday, December 18. They underscored a sense of improvement in the U.S. economy, but raised the fear level about the economies and debt levels in many foreign countries.

First, though, was the sobering fact that the end of the year means lighter trading in all markets as investors enjoy the holidays. It also means buying and selling are affected by end-of-year portfolio repositioning, purchases and sales for tax purposes, and other seasonal factors that easily distort our view of the markets’ current direction. It is time to take current short-term forecasts with a bit of healthy skepticism, therefore.

Second, then, is the amazing recovery of the U.S. dollar’s exchange rate against the currencies of most other major economic powers. As of last week, the dollar had regained all losses against those currencies since September of this year. What has fueled this resilient strength? The primary force is a belief that the economy is moving toward an increasingly sustainable recovery. This belief has had its ups and downs in recent months, of course, creating something of a roller coaster ride for interest rates (within a relatively narrow channel) and for commodity prices.

But there is more at work here. The unavoidable issue, even for those who have been certain that the dollar would continue to lose its exchange value, is that many foreign currencies look far worse than does the dollar and their countries’ economies appear to be far more tentative than ours. By contrast, the U.S. economy looks relatively strong.

Dubai, threatening to suspend payments on $60 billions’ worth of borrowing for three months, blew the cover off of the growing problem of fiscal weakness in many countries. At present, Greece is sharing the spotlight as it faces a lowering of its credit rating unless it makes credible austerity moves. Just behind Greece on the crisis ladder are Portugal, Ireland, Italy and Spain. And news spread recently of trouble brewing in Austrian banks. The tremors among the currencies of these countries send investors to the safer haven of dollar-denominated investments, even as our Treasury rates have lately been rising.

The third thing to notice, perhaps playing itself out at present, is the fact that the spread between the 10-year Treasury note and the 30-year average fixed mortgage rate narrowed in recent weeks, probably to the point that it’s been predicting a possibly higher mortgage rate. And indeed, the Freddie Mac average rate on its 30-year fixed-rate mortgage climbed again for the week ending December 17 from 4.81% to 4.94% (which is still notably lower than last year’s 5.19%).

The markets seemed to indicate that our economy is continuing to strengthen last week. But they also warned of growing crises abroad.